mspohr
Well-Known Member
The problem with bankruptcy is that the owners strip assets and gain profit from the bankruptcy sale. The new owner has a low cost asset and will pump it dry. 51% owner could shut it down and help employees transition.
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This is the basic problem with any investment in fossil resources. The assets will be used regardless of who owns it. So we need to think more upstream on this problem. We need to shut down further investment into new fossil assets.
The unintended consequence of a government buying up distressed assets is that it provides basic price support for those assets and thereby induces continued investment in new assets.
Keep in mind the dysfunctional economics of US shale. Generally, investors have lost money. But so long as there are buyers for wells, E&P outfits will drill those wells. It is irrelevant if those well ultimately do not produce enough economic value to justify the investment. E&P companies are not selling oil; they are selling wells. As long as there is a buyer for wells, drillers will keep drilling.
So for me, the enormous risk of nationalizing oil companies is that the government become a willing and capable buyer of wells and other assets. If the government buys wells, just to shut them down. This only provides price support to oil via reduction in supply. Thus, other investors will come along to buy up the additional wells that drillers drill. So ultimately there is no real reduction in the amount of oil consumed, but drillers get compensated for drilling wells that the government shuts down. It is more important to shut down financing to the drillers, than to close in wells.
mspohr
Well-Known Member
That whole reduce investment thing doesn't seem to be working
The world’s top banks remain committed to financing fossil fuels
Banking on Climate Change adds up financing from 35 private-sector banks to the fossil fuel industry, finding that in the four years since the agreement, these banks have funneled $2.7 trillion into fossil fuels. In direct opposition to the agreement, annual fossil financing has increased each year since the signing, reaching $736 billion in 2019.
What assets do you think they're stripping?
The well equipment? They're worthless without the wells. Literally.
The wells themselves? The owners will take a bath on whatever value they can get out of those wells, and that's what we want to see happen. The new investors will get them for a dirt cheap price, but that doesn't make the wells profitable enough to continue drilling for many years. The potential effect that we hope to see is that the owners can't price the wells low enough for any buyers to want them.
Your proposing that the US government be that buyer of last resort. That's actively supporting the owners, not the workers. Use those billions of dollars to pay the workers (call it an Oil Workers Unemployment Insurance if that helps) directly if they get laid off. If anything, it should cost much less than $1B to help all the workers directly!!
TheTalkingMule
Distributed Energy Enthusiast
Any govt intervention of that style will just end up a massive subsidy. All this stuff has already happened in the German utility sector and we can simply follow their blueprint.
As renewables took more and more share of the electricity market, each of the three major utilities in Germany quickly went bankrupt. Most of their profit was made on selling peak supply, and when solar crushed that there was no angle to profits.
Each of these three utilities tried to do what all these US oil companies are going to try to do, they put all their stranded assets in a "new company" with the intention of letting that company die. The German government simply rejected that plan and force these companies to restructure and use the bankruptcy courts in an ethical manner. Simple, logical regulatory oversight.
18 months later, each of these utilities exited bankruptcy and now exist as a proper grid services utility. Checks were cut from the government to compensate things like gas/coal/nuclear plants built in good faith, but it was all done quite reasonably.
mspohr
Well-Known Member
All companies (even bankrupt companies) have assets... cash, equipment, producing wells, IP, etc. When things start to go downhill, the directors of the company quickly allocate those assets to themselves (bonuses, dividends, outright grants) leaving nothing for workers or creditors. I'm sure you've seen this happen many times.
A producing well has value. It's cheap to just keep pumping. If you don't have to pay debt service on the loan used to drill it, it can be quite profitable.
TFA (not I) proposed that the government should buy these cheap assets and shut them down to keep the oil in the ground.
Here's what will keep oil in the ground:
The further down the price remains, the less oil will be produced. Anything that props up the price adds to ultimate production figures and total atmospheric carbon.
The further down the price remains, the less oil will be produced. Anything that props up the price adds to ultimate production figures and total atmospheric carbon.
Theft of company assets is against the shareholders or creditors. They can sue the thieves as protection against such theft. Leaving nothing for the workers is despicable, but happens in bankruptcy, regardless of whether insider theft happened or not. That's why there's unemployment insurance (I've used it twice, so far).
But you don't spend multiple billions to protect an industry just to save much less than that with its employees. It doesn't do what TFA says it will do. I'm sorry, but they're flat out wrong.
mspohr
Well-Known Member
They will pump regardless of price
Oil prices could fall below zero: Analyst
Excess supply from OPEC and Russia, coupled with crumbling demand "are leading to concerns about a surplus that could overwhelm global storage,” wrote Francisco Blanch, a commodity strategist at Bank of America.
Oil prices could fall below zero: Analyst
Excess supply from OPEC and Russia, coupled with crumbling demand "are leading to concerns about a surplus that could overwhelm global storage,” wrote Francisco Blanch, a commodity strategist at Bank of America.
That's what I've been saying.
The point here is that low prices are what drives away investment in the first place. Investors have been very complacent thinking that OPEC would continue to extend price support. Now they look to governments to bail them out. They never really believed they would be exposed to seriously low prices without something to bail them out. Take those safety nets away, and low prices will send investors packing.
I don't care about the oil in wells that are currently producing. Natural decline rates will put a limit to what existing wells can produce. We need to stop drilling excess new well. Only the fear of losing money will end the investment in new wells.
Negative spot prices for crude would be quite a sight to see. Basically oil production would have to exceed storage capacity. The negative prices would basically pay buyers to find new capacity for storage or disposal.
The alternative to expanding storage is for some producers to shut in existing wells. Shutting in a well means that production cannot resume without substantial cost to re-drill a well. So an owner of the well would typically forgo all future revenue from an existing well to shut it in. So if prices are negative and expected to remain low for the duration of the residual life of a particular well it may be worth more to shut in rather than to continue production. Other producers with wells having more substantial residual life are hoping to ride out negative and low prices in the short run so as to enjoy the residual value of the well in the long run.
So we can see the choice between shutting in or riding out negative prices depends critically expected oil prices (as well as the residual life of existing wells). If the Saudis and Russia can convince the market that painfully low prices will persist, i.e., drive down oil price expectations, then they can frighten other producers into shutting in some amount of production.
From what I understand, Saudi Arabia is geologically endowed with some of the longest producing wells. They also have some ability to slow the rate of production without completely shutting in a well. This gave them the ability to be a swing producer. They could crank the spigot down and up without incurring serious capital cost. They used this swing producer superhero power to control the price of oil. But the problem they have is that they have wanted to maintain such a high oil price that it enabled US shale to steal market share from them. So I see them doing an about-face. If they really want to preserve the long-term value of their wells and reserves, they need to pivot from a swing producer strategy to a low price / high volume business model. The more they can frighten shale produces into thinking it will losses for the duration longer than the residual life of shale wells, the more they can clear shale from the market to restore market share for the long run.
So in the short run, it looks irrational, like a game of chicken. But the geology of shale forces shale producers to play a short run game, while the geology of Saudi Arabia gives them the option to play a long run game. Grab a bucket of pop corn. This is capitalism at its finest.
The $638 Billion Cost Of Keeping Coal Alive | OilPrice.com
Time to take coal off of life support. We can use the respirators elsewhere.
Time to take coal off of life support. We can use the respirators elsewhere.
mspohr
Well-Known Member
TheTalkingMule
Distributed Energy Enthusiast
Nobody(!) Is talking about the oil industry being on a parallel path to coal. It's really astonishing.
Still want to wait and see if there's a bailout/recovery before discussing in detail. No need for us to help these hedge fund idiots! Fascinating financial scenarios to be debated!
Still want to wait and see if there's a bailout/recovery before discussing in detail. No need for us to help these hedge fund idiots! Fascinating financial scenarios to be debated!
So Brent is up a little bit today to just under $31. The impression I get is that price changes in oil and the stock market are highly correlated right now. This is my subjective impress as I have not done the quantitative analysis to confirm that, but it may be worth keeping an eye on.
Funny, this takes us right back to the original idea of this thread.
TheTalkingMule
Distributed Energy Enthusiast
WTI has dropped below $20 and is taking the market with it. It's game over for most US oil even with a massive bailout.
World’s Top Oil Trader: Global Demand To Plunge More Than 10% | OilPrice.com
It surprises me that lock down might only be a 10% reduction in oil demand. That seems to imply that 90% of consumption is for some essential use. That seems way too high to me.
It surprises me that lock down might only be a 10% reduction in oil demand. That seems to imply that 90% of consumption is for some essential use. That seems way too high to me.
As virus destroys fuel demand, global refiners prepare run cuts
Wow, refiners are getting crushed. Motor fuel demand is down so sharp that refiner margins are negative in several markets. Obviously, the price of crude is not falling fast enough to keep refiners in the black.
It seems to me crude prices will continue to plummet. Many refiners got caught off guard, thinking that low crude prices signaled a good time to stock up. But then fuel prices dropped faster than they expected. Refiners will need to correct this course, which likely mean buying less crude.
Strange times might just give us a feel for what is in store with structural decline in fuel demand. I was speculating awhile back that refiners are in a precarious position.
Wow, refiners are getting crushed. Motor fuel demand is down so sharp that refiner margins are negative in several markets. Obviously, the price of crude is not falling fast enough to keep refiners in the black.
It seems to me crude prices will continue to plummet. Many refiners got caught off guard, thinking that low crude prices signaled a good time to stock up. But then fuel prices dropped faster than they expected. Refiners will need to correct this course, which likely mean buying less crude.
Strange times might just give us a feel for what is in store with structural decline in fuel demand. I was speculating awhile back that refiners are in a precarious position.
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